Euro falls as EU crisis deepens
Monday June 20, 6:28 am ET
By Katie Hunt
LONDON (Reuters) - The euro fell toward last week's nine-month low versus the dollar on Monday after European Union leaders failed at the weekend to agree on a long-term budget, plunging the bloc into deeper crisis.
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The euro fell as low as $1.2182 in Asian trade before recovering to $1.2227 by 0950 GMT, still down around more than half a percent on the day.
The EU leaders extended the deadline for ratifying a proposed constitution two weeks after French and Dutch voters rejected it -- which at the time triggered a wave of euro selling.
The summit breakdown, which could threaten the future of political and monetary integration in the 25-nation bloc, pushed the euro down by as much as one cent in Asia, halving gains made on Friday following a record U.S. current account deficit.
"They didn't get an agreement over the weekend so the euro opened a lot lower," said Lee Ferridge, senior proprietary trader at Rabobank.
"With the "no" votes, the budget problems and the growth issues -- it will drift lower this week," he added.
The euro is facing a key technical and option-related support at $1.20, a break of which could unleash a flood of further euro selling.
The dollar was up 0.2 percent on the day at 108.79 yen.
EURO POLICY
Euro zone policymakers welcome the euro's fall of nearly 10 percent this year as it helps exports, and are pressuring the European Central Bank to cut interest rates to kickstart the sluggish economy.
Calls for lower rates in the euro zone contrast with the rising rates in the United States, a factor underpinning dollar gains as investors pursue better returns.
Federal Reserve Bank of Minneapolis President Gary Stern sees no reason for the Federal Reserve to stop raising interest rates now as the economy expands at a desirable pace, Japan's Nihon Keizai Shimbun newspaper reported on Monday.
French Prime Minister Dominique de Villepin said on Saturday the euro-dollar exchange rate was now more realistic and should not be allowed to create handicaps to competitiveness.
Villepin also said euro zone finance ministers should discuss foreign exchange policy with the ECB and European monetary policy should integrate policy on exchange rates better.
His remarks echoed comments last week from Luxembourg Prime Minister Jean-Claude Juncker, the chairman of the 12-nation eurogroup, who called for euro zone finance ministers to be more forceful in expressing their views to the ECB.
"In terms of general stance they prefer the euro to be lower than higher. But the euro is in line with most estimates of fair value in terms of long-term competitiveness -- $1.15-20 or thereabouts," Adam Cole, senior currency strategist at RBC Capital Markets.
Elsewhere, the semi-official China Business News said China's foreign exchange reserves, the world's second largest, rose $81.1 billion in the first five months of 2005 to $691 billion.
China buys almost all foreign currency that comes into the country to keep the yuan pegged near 8.28 to the dollar.
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